Levy of Stamp Duty on Merger Schemes
[ Surbhi Jaju & Hansaja Pandya ]

 

Surbhi Jaju is an Associate at Lakshmikumaran & Sridharan and Hansaja Pandya is a 3rd year B.A LLB student at Gujarat National Law University.

Introduction

Mergers and acquisitions are manifestations of momentous growth and are critical tool of business strategy.[i] They are used as instruments to access the market through an established brand, to get market share, to eliminate competition, to reduce tax liabilities, to acquire competence or to set off accumulated losses of one entity against the profits of the other entity.[ii] Every scheme of restructuring a company requires approval from the National Company Law Tribunal (NCLT). Many states in India levy Stamp Duty on orders of the tribunal approving the merger scheme. This has made the cumbersome and court centric process of merger and acquisition more expensive. This article analysis the inconsistency in Stamp Duty Laws and reasons as to why the recent imposition of Stamp Duty laws on consent orders of the NCLT approving mergers scheme, imposed by Tamil Nadu is based on unsound premise and hence invalid.

Stamp Duty is the subject matter jurisdiction of both the Centre and the State falling under Entry 91 of Union List and Entry 63 of State List in the Schedule VII respectively. As a result some of the States in India have enacted their own Stamp Acts whereas others have adopted the Indian Stamp Act, 1899 with their respective state amendments. This has resulted in inconsistency in stamp duty regimes of different states inhibiting the process of mergers and acquisitions.

The lack of uniformity is largely seen in the definition of the term ‘conveyance’ which entails charge of Stamp Duty. The Indian Stamp Act defines conveyance as –

“every instrument by which property, whether moveable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by Schedule I.”

Points of Contention

The primary point of contention in this regard is whether the scheme of merger sanctioned by NCLT is an ‘instrument’ within the meaning of section 2(14) read with section 2(10) and Article 23, Schedule I of the Indian Stamp Act, 1899. While several states such as Rajasthan, Maharashtra, Gujarat and Haryana etc. have specifically included a court order approving a scheme of merger and amalgamation under the definition of “conveyance”, imposition of Stamp Duty on orders of NCLT approving the scheme of merger of companies vide Circular No. 49282 P1 2018 dated November 20, 2018 (‘Circular’)[iii] by state of Tamil Nadu lies in a grey area as the Stamp Act for the state of Tamil Nadu is yet to receive the assent of the President. Unless the definition of the term ‘conveyance’ in the Tamil Nadu Stamp Act in not amended by the legislature, a Circular cannot by circumventing the act subject consent orders of NCLT approving schemes of mergers to levy of Stamp Duty.

Hence the grounds on which the Circular has been introduced are invalid and do not hold any value as on today. The foundation of the levy of Stamp Duty in the Circular is based on the Supreme Court judgement of Hindustan Lever & Anr. v. State of Maharashtra, (2004) 9 SCC 438[iv] the court held that –

“the order passed under Section 394 is founded on consent and this order is an instrument as defined under Section 2(1) of the Bombay Stamp Act. The State Legislature would have the jurisdiction to levy stamp duty under Entry 44 List III of the Seventh Schedule of the Constitution and prescribe rate of stamp duty under Entry 63 List II.”

The same was reiterated in the case of Li Taka Pharmaceuticals v. State of Maharashtra, (1996) 2 Mah LJ 156[v] and in Hero Motors Limited v. State of U.P. and Ors, AIR 2009 All 93[vi].

The meaning of the term ‘instrument’ was ambiguous and discussed in various judgments. The Bombay High Court in Chief Controlling Revenue Authority and Anr. v. M/s Reliance Industries Limited Mumbai and Anr, AIR 2016 Bom 108[vii], clarified that the term ‘instrument’ includes only the order of the approving authority and not the scheme itself. The court reasoned that a merger is only operative once the approval of the court has been granted without which the scheme would have no effect. Stamp Duty can thus be levied only on the instrument that gives effect to the transfer of assests.

Similar reasoning was provided in the decision of Gemini Silk Mills Ltd. v. Gemini Overseas Ltd., (2003) 53 CLA 328[viii] to support the levy of stamp duty on High Court orders approving scheme of merger. However, in 2004, the Division Bench of the Calcutta High Court overruled the above judgment in the case of Madhu Intra Ltd. v. Registrar of Companies, (2004) 3 CHN 607[ix]. The Court held that the transfer of assets and liabilities of a transferor company to the transferee company takes place on an order being made under section 394(1) of the Companies Act without any further act or deed and hence the order of the court sanctioning the ‘scheme’ would not qualify to be an ‘instrument’ as the transfer is purely through operation of law. Madras High Court has also in the cases of, T.T.Krishnamachari & Co v. The Joint Sub-Registrar, (2009) 88 CLA 131[x] and Srinidhi Industries Ltd. v. Sub-Registrar, (2015) 1 CTC 530[xi] categorically held that order of mergers and amalgamations will not be liable to stamp duty. State of Tamil Nadu ought to respect and weigh in the reasoning of the Court while affecting the Stamp Duty laws of the state.

Further, the orders of the High Court are binding on all the authorities of the state in absence of any legislative Act and no state authority can act contrary to it.[xii] The Circular effecting stamp duty issued in the state of Tamil Nadu defers with the Madras High Court decisions. The Director General of Registration is bound by High Court order until the Tamil Nadu Stamp Act of 2013, receives presidential assent.

The Circular has also erred in citing the decision of the Apex Court in Hindustan Lever case since that case is strictly limited to only the Bombay Stamp Act. State of Tamil Nadu did not amend its stamp laws till 2013 when a new Tamil Nadu Stamp Act, 2013 was enacted, but the same is still pending the assent of the President of India. Thus, till the Tamil Nadu Stamp Act, 2013 receives the assent of the President, an order of the High Court sanctioning an amalgamation or merger can not be subjected to stamp duty. Similarly the principle of law laid down in Chief Controlling Revenue Authority and Anr. v. M/s Reliance Industries Limited Mumbai and Anr as mentioned above is applicable only when consent orders of High Courts on mergers are specifically included within the ambit of ‘conveyance’ through a legislative amendment which is not the case with Tamil Nadu.[xiii]

The Circular violates the constitutional mandate under Article 265 of the Constitution which provides that, “no tax shall be levied or collected except by the authority of law.” Tax cannot be imposed through a Circular without the legislature amending the main Act.

Conclusion

In light of such irregularities, the Circular is illegal and stamp duty cannot be charged upon merger schemes unless the Tamil Nadu Stamp Act, 2013 receives the Presidential assent. The imposition of stamp duty can have grave implications on the increasingly positive M&A trends in India as it may lead to an increase in the transaction cost especially when merger of a class of companies is concerned.

Increase in transection cost and highly inconsistent state laws may slow down the M & A trend in India. Therefore, the Stamp Duty laws should be rectified and made uniform at the earliest, especially in the circumstances where India is aiming to become the most favarable investment and business destination and is on an endeavour to better its spot on the Ease of Doing Business Index.

 

 

 

[i] Report of the Expert Committee, Mergers and Aquasition, Ministry of Corporate Affairs (Dec. 06, 2018, 9:29 PM), http://mca.gov.in/Ministry/reportonexpertcommitte/ chapter10.html.

[ii] N. Rani, S.S Yadav & P.K Jain, Mergers and Acquasitions: A Study Of Financial Performance, Motives and Corporate Governance 1 ( Springer 2016).

[iii] Circular No. 49282 P1 2018, Director of Registration (Dec. 06, 2018, 6:45 PM) https://tnreginet.gov.in/portal/webHP?requestType=ApplicationRH&actionVal=homePage&screenId=114&UserLocaleID=en&_csrf=53b34fc8-ef0d-4968-9d9d-dc0db08e1af5.

[iv] Hindustan Lever & Anr. v. State of Maharashtra, (2004) 9 SCC 438, https://indiankanoon. org/doc/1859141/ .

[v] Li Taka Pharmaceuticals v. State of Maharashtra, (1996) 2 Mah LJ 156, https://indiankan oon.org/doc/257873/.

[vi] Hero Motors Limited v. State of U.P. and Ors, AIR 2009 All 93, https://www. Legalcrystal .com/case/457908/hero-motors-ltd-vs-state-u-p-ors.

[vii] Chief Controlling Revenue Authority and Anr. v. M/s Reliance Industries Limited Mumbai and Anr, AIR 2016 Bom 108, https://indiankanoon.org/doc/31807137/.

[viii] Gemini Silk Mills Ltd. v. Gemini Overseas Ltd., (2003) 53 CLA 328, https://indiankanoon. org/doc/1990429/.

[ix] Madhu Intra Ltd. v. Registrar of Companies, (2004) 3 CHN 607 https://indiankanoon.Org /doc/227477/.

[x] T.T.Krishnamachari & Co v. The Joint Sub-Registrar, (2009) 88 CLA 131, https://indian kanoon.org/doc/228427/.

[xi] Srinidhi Industries Ltd. v. Sub-Registrar, (2015) 1 CTC 530, https://www.casemine .com /judgement/in/5609078be4b0149711168748.

[xii] East India Commercial Company v. The Collector of Customs, AIR 1962 SC 1893, https://i ndiankanoon.org/doc/1839963/.

[xiii] Arvind P. Datar, Stamp Duty on Merger- An Illegal Circular, Pressreader (Dec. 05, 2018, 7:46 PM), https://www.pressreader.com/india/the-hindu/20181203/282282436367284.

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